Value capture tax on a rocky ride

Bronwen Gora // News // 25th Jun 2019

Developers in western Sydney’s Parramatta are dealing with the complex issue of a value capture tax being imposed on developments within the suburb.

While a similar tax has been adopted by other councils in Sydney, Parramatta Council’s version has ignited significant controversy as opponents claim it is being applied to a greater extent than anywhere else yet not pegged adequately to tangible outcomes.

The council on the other hand believes its scheme, which will see it reap about 50 % of the land value uplift on a rezoning, is imperative to help subsidise an estimated $1 billion in infrastructure required due to the area’s rapid growth.

While developers are not opposed to the concept of such a tax, CEO of property advisory firm Trifalga Joe Abboud says Parramatta Council’s version is hazy on detail yet hefty on levies. Branding it the “intangible tax” he says, “If it’s pegged to something tangible against the project, or the infrastructure around it, it does make sense.

“Yet this tax has singlehandedly slowed down supply and driven the price of the average unit up by almost $50,000. It is counterintuitive to affordable housing.”

So what is a value capture tax?

As stated in a March 2017 Grattan Institute report, at its core “value capture is a tax on the increase in land values that results when a new or upgraded piece of infrastructure improves an area’s accessibility.”

For example, construction of Hong Kong’s metro railway was funded solely from the sale of development rights around stations and close to one third of London’s CrossRail is being funded by levies on nearby businesses.

In Australia, Victorians were among the first to experience value capture when a charge depending on the value added by a rail extension from Darling to Glen Waverley in the 1920s was levied on properties within one mile of the train line.

About a third of the Sydney Harbour Bridge costs were funded through a “betterment tax” on property owners who benefited from the harbour link, and more recently up to 25% of the Melbourne City Loop was financed by a Benefited Area Levy in which CBD landholders and businesses benefiting from accessibility created by the infrastructure contributed to the project’s cost.

Even so, value capture is still rarely used in Australia compared to other countries – which begs the question why.

What are the issues surrounding value tax?

Quite simply, difficulty in its application due to a range of aspects.

“This is partially due to differences in how state and local jurisdictions operate and have evolved over time, as well as differing relationships between local, state and national tiers of government between countries,” the report states.

“Putting all this into practice is hard,” the report states. “Property prices go up – and down – for many reasons. Drawing a boundary around a new piece of infrastructure to distinguish those who must pay the new tax from those too far away to beneﬁt is bound to involve rough justice.

“It’s not easy for governments to convince people that the new tax bill they receive still leaves them better off – homeowners receive the beneﬁt of the new project on paper but have to pay the tax bill in cash.

“And value capture is very hard to apply to projects such as roads and hospitals where the beneﬁts are more diffuse.

“The apparent fairness of value capture evaporates if the beneﬁciaries of rail projects pay extra while the beneﬁciaries of other government projects do not. These challenges may explain why value capture has been used so rarely in Australia.”

What will happen in the future?

Value capture appears here to stay. The Australian Government has decreed the states should routinely consider value capture opportunities in all future public infrastructure projects - and the tax is being adopted - to varying degrees - by councils.

In NSW however, while value capture is seen as critical for funding public infrastructure projects, the government has tightened regulations around how the tax is applied by councils after cases where the way it was used had increased costs for new homes by up thousands of dollars.

“Often the money is used to cross-subsidise other areas of local government rather than being used for what it’s meant for – local infrastructure,” NSW planning minister Rob Stokes said in a statement.

While not opposed to the tax, Mr Stokes said it must be applied fairly.

“Councils should be able to capture a reasonable share of the uplift in value from a reasoning to help pay for community facilities and amenities,” he said.“However there need to be checks and balances.”

Mr Abboud agrees, advising those facing such taxes to remain “very well informed” about the levies. “Developers do not have a problem contributing to infrastructure but let it be tangible, benefit the end user and let it stay fair and reasonable.”